72T Help

[limpid lizard]

How does one go about setting one up? I understand the pitfalls, and would rather be beat with a stick, but in trying to get a mortgage, I am constantly turned away because I have assets but no steady income.

I can do the IRA to bank portion online with Vanguard, but how do I do the interaction with the feds? Thanks

 

[Bestwifeever]

I don't know anything about setting up a 72T or if having one would help in the mortgage process, but here is a link:

http://www.early-retirement.org/links/showlink.php?l=9&catid=3

from the "Links" menu at the top of the page here.

 

[limpid lizard]

Let me try again. Where, or to whom, does one turn to start a 72t? I had thought it was the account custodian, but the Vanguard said they are no longer involved in the process.

 

[bbbamI]

I think you would need a CPA that has experience regarding 72Ts.

 

[smileydog]

I know Fidelity has a service where you can put the 72T on autopilot and they will take care of all the transfers. Of course, it's still on you to make sure you don't bust the 72t rules. I know cycling investor is doing 72t also - he may have some input.

 

[Leonidas]

Cycling Investor has answered written about this in the past, and this from the website that OP was referred to:

Q. Are there any IRS filing requirements?
A. That depends on how form 1099-R is coded when you receive it from the Trustee/Custodian that is making the SEPP distributions. If 1099-R box 7 is coded with a 2 (early distribution, exception applies under age 591/2) then nothing additional needs to be filed. If however, box 7 has a code of 1 (Early distribution, no known exception) or 7 (normal distribution) then you must file IRS Form 5329 to claim the exemption to the 10% penalty tax.

Plan early. When you have designed the plan, communicate with the Trustee/Custodian that will be making the distributions and see if they will be using a code of 2 on the 1099-R. If not, prepare to file form 5329 or perhaps a new funding vehicle for the plan.

 

[limpid lizard]

Okay, once more

If I need a haircut, I go to the barber. If I have a toothache, I go to the dentist. If I need a 72t, who do I go to? I read all the lit before I decided I did not want a 72t. Now it appears that want one or not, I am going to have to take the plunge.

Surely someone here has done this and can tell me in simple terms where I get the paperwork to fill out myself, or say, "I went to my FA, CPA, yada yada yada." This is the plan part of the plan early, and from my reading must be designed to meet one of the exceptions to the 10%penalty rule. In the case the 5 years of equal payments exception.

This has been like reading a recipe that calls for eye of newt and not knowing where to find a newt.

 

[Bestwifeever]

Well, we did the best we could to help, LL--maybe do what bbbam1 suggests and call a CPA.

I went to the Vanguard site and searched for SEPP and got this result:

https://personal.vanguard.com/us/literature/search?searchInput=S164&search_mode=true

You can download a form there and apparently get your plan started.

 

[limpid lizard]

Thank You, Thank You, Thank You

Those are the forms I called and asked Vanguard for this morning. The reply was that they no longer supported the calc of SEPP. Stupid me, after that reply I never thought to search their online forms.

Calling a CPA scares me. I do not know any, and I might get the dumbest one in town. If the CPAs calculations are wrong, I pay the penalty. I have a lot more faith in the gang here steering me straight. Thanks again, LL

 

[REWahoo]

LimpLiz, have you seen this website? 72t on the Net

Supposed to be an excellent 72t resource.

 

[limpid lizard]

Yes Indeedy

That is the site that originally convinced me that I did not want to do a 72t.

Many years ago as a draftee, I would sit in my little hole watching the wire while thinking that if I could only find myself a little place in the country where I could raise a garden and a cow or two, I'd be happy.

This morning I got a yes to my offer on a place. I have not seen a signature yet, so I still have my fingers crossed. The place is about 30 miles from here. It is an old homestead sitting out in the country by itself. The garden, the orchard, the barns, and the root cellar are all in good shape. The house needs a little updating and the old bunkhouse needs considerable repair.

Banks have been a little frustrating. I was hoping to pay cash for a place, but this one is about 20K more than I have in hand. I have been told various things. One doosie was that I am too young to be retired. I'm merely unemployed. Most want verification of an income stream. LL

 

[frayne]

I have a 72T set up through Fido who my IRA is with. They did the initial calculations, I checked them against one of the on line 72T calculators and I also had a local CPA check, all were very close. I do the 5329 form at tax time and have been taking the distributions for about two and half years now with no problems.

 

[Leonidas]

I came close to doing a SEPP when I retired and did a lot of research. A SEPP is just you taking early distributions from an IRA, 403b or qualified retirement account, and claiming an exception to the 10% penalty for an early distribution.

The only form required would be whatever your account custodian needs to know how much money to send you. Through that form, or through some other means of communicating with the custodian, you would like to be able to notify them that the payment is in your SEPP plan and you want them to code the 1099-R so that it indicates that an exception to the early withdrawal distribution 10% penalty applies in your case. But even if you can't get them to do that, you just have to file IRS Form 5329 with your income tax return to claim the exception.

While I'm sure that you could find someone to set the plan up for you, there is no legal requirement that you do so. If you do it yourself, I think the 72(t) website is an excellent resource. If you get in over your head go seek help here or elsewhere. A lot of custodians will help you set up a plan for a SEPP (forms, brochures, calculators, etc.) but they don't want to take responsibility of administering it. My pension plan has a FA on staff who introduced me to the concept, then checked my work once I had come up with a plan and gave me some additional tips. But when it came to administering the plan it was all hands off; the whole thing was my responsibility and all the pension had to do with it would be sending me a check based on my requesting a distribution.

The penalties for screwing up a SEPP are severe and the IRS is not very forgiving. But doing a SEPP correctly doesn't look all that difficult. Most mistakes seem to come when people do a poor job of planning the SEPP and then wind up busting the plan by making modifications that are not allowed.

 

[crazy connie]

Begin reading the info at 72t on the Net (they appear to be having an issue today) as well as irahelp.com Ed Slott America's IRA Expert and if you want, feel free to pm me and I can talk with you. I am in year 3 of my 1st 72T and may start a new one in 2010. I think I have a good grasp on the guidelines. The custodians tend not to want to do the calculations which is what the biggest issue is.

 

[limpid lizard]

Current Plan

Thanks connie,

My current plan is to pack my last two years tax returns, and the last IRA quarterly statements, to the one bank that gave a glimmer of hope.

I have a 401K that is mostly mm funds that I draw from for living expenses. I still have enough in that fund to make it to 59 1/2, and that was my primary plan. I broke my IRA into 3 sometime ago in anticipation of needing plan B or plan C.

If the bank will approve a loan, without my creating a 72t, my mortgage payments will be about 65% of what they are now. The bank that I am going to tomorrow is the same one holding my current mortgage. That will be going away the end of the month. My credit report shows that I have not been late with a payment as far back as they have records (1981). I have been making mortgage payments to this bank since 1993. You would think that with many times the amount I want to borrow sitting in assets, that they would consider me a fairly good risk.

Should I fail to persuade them, it will be 72t time.

 

[crazy connie]

OK then, the 72T is plan B and hopefully not needed! Let me know if you need more info as 72T's can be a bit testy. Good luck tomorrow even though it looks like a no-brainer (some lenders have no brains these days). Many lenders do not like to lend to retirees without an income stream. But with 16 years longevity with them and a reduced payment they should accomodate you!

 

[Sue J]

Sorry, I can't offer any help, but the topic is very interesting.

I was a 1st year tax preparer for a "major tax prep company" this year. I had a walk in client (age 58) who had been doing a SEPP from a Trad. IRA for a number of years, $20,000 a year until 2007 when she took $60,000 and then went back to $20,000 for 2008. Because I had been reading topics on this forum I recognized what she was doing. I researched her previous returns and knew that it was a 72(t) situation.

I asked other tax preparers in my office about how to treat a situation where the client withdrew more that the substantially equal periodic payment for a year. I was trying to find out if she lost the exclusion from the 10% additional tax for early withdrawl for all previous years or for just the year with the extra withdrawl? And what happens when withdrawls go back to the original amount? Does she lose the exclusion on future returns?

No one on my office had any idea how to treat this. No one had heard of a 72(t), they just had a little basic knowledge about a few of the exclusions from the additional 10%. After devoting too much (unpaid) time to trying to research this from home, I passed the client to another office that had many more experienced preparers.

I was really interested to find out how this ended up being handled, but by the time it got resolved it was late March and we got busy and I didn't get a chance to find out the results.

I found it scary that no one in my office knew what I was talking about. I'm hoping to take additional classes focusing on retirement issues.

 

[Leonidas]

I was trying to find out if she lost the exclusion from the 10% additional tax for early withdrawl for all previous years or for just the year with the extra withdrawl? And what happens when withdrawls go back to the original amount? Does she lose the exclusion on future returns?

For SEPP distributions, any change in the payment schedule after you begin taking withdrawals may subject you to the 10% penalty tax, plus interest, applied retroactively to all previous withdrawals.

The FA working for my pension fund also mentioned that breaking a SEPP that involved distributions from the lump sum account there (qualified retirement plan) could endanger the separate defined benefit portion as well. He didn't elaborate, and I never researched that aspect, but he made it sound like busting a SEPP could be more of a nightmare that expected.

No one on my office had any idea how to treat this. No one had heard of a 72(t), they just had a little basic knowledge about a few of the exclusions from the additional 10%...I found it scary that no one in my office knew what I was talking about.

That's probably why trustees/custodians won't take any responsibility for 72(t) SEPPs that their clients fund through their company's accounts. They don't want to take on any liability if an employee makes a mistake.

SEPPs seem like useful tools for income to early retirees who have few other options, but the need to have a good plan that anticipates needs can't be underestimated. There are ways to build in some flexibility, but you can't just decide to take larger distributions one year without getting hammered with the penalty.

 

[jdw_fire]

SEPPs seem like useful tools for income to early retirees who have few other options, but the need to have a good plan that anticipates needs can't be underestimated. There are ways to build in some flexibility, but you can't just decide to take larger distributions one year without getting hammered with the penalty.

which is why, if you are going to do this you should get a separate IRA just big enough to provide the SEPP. the rest of your IRA funds should be in other IRA(s) which can be tapped if you need more funds 1 year and that wont screw up your 72t WDs

 

[limpid lizard]

Sitting On My Hands

I went to the bank and applied for a loan yesterday. At this point I am waiting to see whether it is approved before implementing a 72t.

This should be interesting. My credit score came back over 800, total indebtedness came back as $36.00, I asked to borrow 25% of the home sale price, and deposits equal a number of times the total house sale price.

 

[crazy connie]

Then that should be a NO-BRAINER. Hopefully you will prevail. Thanks for the update and let us know once it is a done deal.

 

[limpid lizard]

UGH!

After 12 days of stalling, I told the bank to bugger off. They would not, could not give me an answer either way. At about the 10 day mark, the seller offered to carry the mortgage, and when I had his signature, I called the bank and cancelled.

I had heard of someone else locally that was in the same situation as I. The same bank approved his loan, and then backed out one day before closing. So, before telling them to bugger off, I asked if should be approved, would they be bound to make the loan if my situation did not change. They said no.

 

[CyclingInvestor]

Sorry I did not reply earlier, just got back from a 23 day vacation in Alaska.

My IRAs are with Schwab. I did not "set up a 72t plan". I just file an IRA withdrawal form each year with Schwab that says "transfer $XXXXX.XX to my non-IRA account and check box 2". As long as $XXXXX.XX is the correct amount for that year to qualify under 72t, I do not have to pay all the penalties on it. I trust my little spreadsheet to tell me how much to withdraw. The only Fed interaction is on my estimated taxes 4 times a year.